Even as the controversy over the alleged depletion of the nation’s foreign reserves and Excess Crude Account (ECA) rages on, the Nigerian economy seems to be on auto-pilot, and consequently vulnerable to flighty foreign portfolio investments, fickle foreign direct investments and measly meddlesomeness by an apex bank that operates against the national interest. The result has been an economy of excess liquidity and its attendant negative features of escalating non-investable national domestic debt, hostile economic environment, high inflation, high lending rates, unrealistic exchange rate, monetary tightening measures, restricted access to bank credit, high bank non-performing loans, comatose real sector, mounting joblessness and an economy in free-fall; a disaster waiting to happen.
Last week saw the Central Bank of Nigeria (CBN) selling dollars to save the naira, which dropped to a record low after JPMorgan Chase said, Nigeria’s debt may be cut from its local-currency emerging-market indexes. Analysts say it would be a big blow if Nigeria; Africa’s biggest economy was excluded from the indexes, even as average yields on naira-denominated government debt soared 2.5% points in the past three months, compared with a drop of 47 basis points for emerging-market local-currency securities. Nigerian bonds were the worst performers after Russia among 31 developing nations, losing 16% for dollar investors. If anything, this is a wake-up call to the CBN to immediately stop digging the economy into a deeper hole with a naira defence strategy that has put the economy on life-support.
With Nigeria dependent on crude oil exports for 70% of government revenue, the more than 50% drop in oil prices has sparked investor outflows that Nigerian policy makers have tried to stem by devaluing the naira and raising interest rates to a record 13%. The naira fell 11% over the past three months, the most among 24 African currencies. The naira depreciated to an all-time low of 188.48 against the dollar. Nigeria was placed on Index Watch Negative for JPMorgan’s GBI-EM indexes after CBN measures announced in December, reduced foreign exchange and bond trading, making it difficult for foreign investors to replicate the gauge. JP Morgan said Nigeria’s inclusion in the index will be assessed over the next three to five months. Daily trading volumes for the naira are still just $20 million to $30 million, compared with about $300 million to $500 million six months ago. And sourcing FX has become a nightmare, as commercial banks struggle to access foreign exchange for their clients.
For the Nigerian economy to grow, the nation’s foreign exchange earnings must be better managed by the CBN, which continues to withhold Federation Account (FA) dollar accruals, which it replaces with CBN freshly minted purported naira equivalents for sharing to Federation Account beneficiaries. CBN disburses part of the withheld forex through the Wholesale Dutch Auction System (WDAS) and bureaux de change (BDCs). Generally, WDAS rates are lower and more business-friendly than BDC rates. Also, all genuine businesses operate accounts with Deposit Money Banks (DMBs), which have access to WDAS forex. Yet, the CBN short-supplies WDAS demand while meeting in full BDC demand for government forex every quarter. Channeling official forex through BDCs amounts to a deliberate CBN policy, to subvert genuine businesses. This must stop immediately
Former President Olusegun Obasanjo had accused the Jonathan administration of squandering foreign reserves of over $60 billion which they inherited, but now reduced to $34.5 billion while the ECA had plummeted from $9.43 billion to $3.1 billion. But Finance Minister, Ngozi Okonjo-Iweala, challenged the figures, explaining that at the end of May 2007, when the Yar’Adua/ Jonathan administration took office, Nigeria’s reserves stood at $43.13 billion, comprising the CBN’s external reserves of $31.5 billion, $9.43billion in the ECA and $2.18 billion in federal government’s savings. According to the government, the fall in reserves was largely due to the instability in the global economy and the oil economy which caused the CBN to intervene by using some of the reserves to defend the value of the naira.
It is CBN’s responsibility to channel foreign exchange to the most beneficial sectors in the economy, by adopting international best practices. To illustrate with unadjusted pooled 2012 data for the sake of simplicity, if FA dollar accruals had been allocated appropriately through the beneficiaries’ Domiciliary Dollar Accounts (DDAs), there would have occurred spread over the year in the single and open forex market operated by banks; a supply of dollars (from government sources) totaling $119.2 billion and a demand of $79.1 billion by end-users backed with naira funds in the system. Such supply/demand scenario would have produced a market-determined naira exchange rate that was realistic and offered no cause to be defended by the apex bank. That exchange rate would have been attractive and tended to appreciate, thereby causing funds retained in DDAs to lose value. Partly to avoid suffering any losses and partly to settle naira commitments, banks would have been advised to sell the excess dollar supply of $40.1 billion to the CBN for additional naira funds at the market-determined rate or even at a premium. Such last resort sale by DMBs of excess dollars builds up or swells external reserves.
The CBN only has to define and constantly redefine the economic transactions that should be eligible for the country’s foreign exchange as well as strictly enforce same with an unwavering view to making the economy produce domestically to the maximum possible level what the country consumes. That is the road to economic diversification and rapid development. Reports on the so-called strength of the rebased Nigerian economy by government functionaries may be good on paper, but they remain artificial to many Nigerians. Apart from grinding poverty which pervades the land and the little or no impact of the much-vaunted macro-economic growth figures on the lives of the people, the negative impact of fiscal deficits is everywhere.
Rather strangely to economics, the CBN continues to warned that government spending of budgeted revenue will constitute a major risk to the inflation and exchange rate outlook. According to the ground rules, any drop in oil sales receipts owing to real or exaggerated causes like fluctuating crude output and falling prices should not negatively affect the approved budget if there are funds in the excess crude account. Any contrived under-implementation of the budget is therefore unacceptable. Also, the naira exchange rate is officially manipulated and artificial. Despite the country’s string of favorable balance of payments, the naira value recorded the biggest fall and highest gain over the preceding 18 months. Worse still, to use the Dutch auction to manipulate the naira exchange rate ab initio renders all forms of domestic production requiring foreign exchange uncompetitive internationally.
Consequently, some 80% of finished products in the markets are imported; installed manufacturing capacity utilization stands at about 50%; the share of GDP attributable to the manufacturing sector hovers around 4.0 per cent; current unemployment rate exceeds 23.9%; and the absolute poverty level of over 70% has probably worsened. In one word, the Nigerian economy is weak, very weak.
